Outsourcing of IT, call centers, administrative services and knowledge work has become a global trend. Watching India’s success in the outsourcing space, many African countries, including South Africa, Egypt, Morocco, Kenya, Ghana and Mauritius, have tried to build their own outsourcing capabilities in recent years (see recent article by Abbott). In fact, 8 out of the Top 100 outsourcing destinations worldwide, according to the latest 2013 Tholons Ranking, are located in Africa. Not surprisingly, Kenya’s government for example lists business process outsourcing (BPO) as a major economic building block in their Vision 2030. Boasting an improved IT infrastructure, political stability and English language capabilities, Kenya is hoping to become a major BPO hub. Other countries are following suit. But what does it really take to become a global outsourcing hub? Can any country in Africa with low-cost labor, a good IT infrastructure and favorable business climate join the club?
In my new article ‘New Silicon Valleys or a New Species? Commoditization of Knowledge Work and the Rise of Knowledge Services Clusters’ (published in Research Policy) I argue that the answer to this question depends a lot on the service capabilities a particular country can offer. More specifically, service capabilities may vary by the degree of ‘commoditization’. By that I mean that over time, many services, such as IT services, administrative and tech support, and software testing, have become increasingly standardized across products and industries, and less and less client-specific. In general, commoditization creates business opportunities for specialized vendors around the world, and it makes it attractive for client firms to outsource services to these vendors. For example, whereas in the past software developers would typically run their own tests, today many firms outsource testing to vendors who can perform tests for various products and platforms at a lower price.
This is good news and bad news for developing countries in general and Africa in particular. Good news is that service commoditization increases global demand for low-cost technical skills which do not need to be highly product or firm- specific. Thanks to this trend, thousands of service providers have emerged in recent years not only in India and China, but in Eastern Europe, Latin America and Africa, who are capable of performing tech support, call center operations, or software tests. This has generated jobs and career opportunities in particular for students and university graduates in developing countries – albeit at the expense of many well-paid technical jobs in advanced economies.
Bad news is that because so many countries today can potentially train young people to perform commoditized work for global clients, competition and cost pressure have also increased. For example, because of ‘wage inflation’ in India, many client firms have shifted their IT and software operations to cheaper locations with similar capabilities, such as Ukraine. However, the more commoditized a particular service is, the lower the chances of any region to benefit from providing such services in the long run, since there will always be a lower-cost option for clients.
I therefore argue that the ‘trick’ is to provide capabilities that are, on the one hand, commoditized enough to stimulate global demand across products, client firms and industries, but, on the other hand, distinctive enough to lower global cost pressure and competition. For example, Russia has been rather successful in utilizing its rather distinctive pool of highly trained, yet underpaid mathematicians and scientists to take on sophisticated analytical and scientific work from Western firms. India has equally been successful for a long time in utilizing its incredibly large pool of software engineers to take on labor-intensive IT and software work in particular for large client firms across industries. The Philippines have benefitted from their availability of a young population with American English language capabilities suitable for call center and tech support services catering particularly to U.S. clients.
In all these cases, the services provided – analytical work (Russia), IT support (India), call centers (Philippines) – are not product or industry-specific, thus generating high demand. Yet, each region also has certain distinctive advantages which attract particular clients – firms with R&D departments (Russia), large organizations (India), U.S. firms (Philippines). The highest growth potential therefore comes from a combination of sufficient commoditization to attract a large client base, and sufficient distinctiveness to lower global competition. By contrast, capabilities that are too specific are likely to limit global demand, and services that are too generic are likely to increase global competition. This is what I try to illustrate in my article with this inverted U-shape curve (see Figure).
With this insight, we can better assess the potential of African countries to participate in the global outsourcing space. Let’s pick Morocco and Kenya as examples. How likely can Morocco and Kenya by comparison become global outsourcing hubs in the long run?
Let’s look first at Morocco which has been a recent success story in the outsourcing world. Like most African countries, Morocco is a latecomer. Morocco does not provide any particular skill nor is it the cheapest outsourcing location. Its political climate is in fact pretty uncertain. Yet, Morocco has managed to become an important outsourcing hub. Why? Well, what’s striking about Morocco is the ability of its citizens, including those who never enjoyed higher education, to speak at least Arabic, French and Spanish, thanks to the mix of Colonial powers (and tourists) shaping Morocco over centuries. Morocco is also located in a time zone close to European clients. All this makes it attractive for French firms for example to outsource call centers and tech support to Morocco rather than India or the Philippines. Unless India or the Philippines improve their French and Spanish language education any time soon, Morocco is likely to further benefit from this distinctive advantage. Anecdotal evidence suggests that even Indian providers increasingly set up service hubs in Morocco to cater French client firms.
Now what about Kenya? Kenya offers a good IT infrastructure, English language capabilities and time zone proximity to Europe. Yet despite some early successes, such as the Kenyan call center operator KenCall (see picture), global demand for outsourcing services from Kenya has been limited so far. Unlike Morocco, Kenya has English language capabilities, but, because of that, it also competes with India and the Philippines on cost. (In fact, even Kenyan firms often prefer working with better known and often less costly vendors from India and the Philippines.) Time zone proximity to European clients may be an advantage, but not enough for most clients to switch to Kenyan operators. In other words, compared to Morocco, Kenya’s service capabilities are too commoditized. Whereas Morocco’s French and Spanish language skills provide some distinctiveness, while still allowing for scalable service offerings, Kenya does not have comparable competitive advantages.
There might be another way though: African countries like Kenya increasingly turn their attention to regional rather than global clients. When interviewing Kenyan firms, I realized how important clients in Central Africa and South Africa have already become. For example, some Kenyan service providers offer IT infrastructure and software services to governments in their neighboring countries in Central Africa, thereby leveraging political connections in the region. But guess where these service capabilities come from? Not just Kenya, but increasingly India where several Kenyan vendors have recently established service delivery hubs and training centers to utilize India’s software expertise and reputation.
To conclude, Africa can become an important hub in the global outsourcing space – not least thanks to time zone proximity to Europe. But not every African country can equally participate and benefit from global outsourcing demand. This is because only a few African countries provide distinctive advantages, such as language capabilities, which are valuable to a large enough global client base. Firms and policy-makers need to be smart about this when making investment decisions, and they need to consider alternative, e.g. regional, markets to successfully navigate in this highly competitive space.
Manning, S. 2013. New Silicon Valleys Or a New Species? Commoditization of Knowledge Work and the Rise of Knowledge Services Clusters. Research Policy, 42: 379-390.
Further interesting links:
Kenya’s Vision 2030: http://www.vision2030.go.ke/
AT Kearney’s Global Services Location Index: http://www.atkearney.com/gbpc/global-services-location-index
Tholons 2013 Top 100 Outsourcing Destinations:
Abbott, P. 2013. How can African Countries Advance their Outsourcing Industries: An overview of possible approaches. The African Journal of Information Systems, 5 (1), 27-35.
[This blog article is adapted from the original post “Tech support en français s’il vous plaît!? The challenges of becoming a new global outsourcing hub” on the Organizations and Social Change blog run by the College of Management, University of Massachusetts Boston]
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